Blog

Payments Are Evolving – Will Airlines Be Able to Catch Up?

Posted on: 15 Apr 2019

Author: Vojin Rakonjac, Head of Payment Solutions

For the past decade, we’ve witnessed the incredible rise of FinTech as an industry and saw how it changed the way we look at payments. Innovation in this space is so fast and so incredible that it became hard to keep track of everything that is happening, even if you are actively involved in the payments industry! New players are entering the market and bringing their own innovative pieces of the puzzle. FinTech companies really led the way to the evolution of payments by introducing new business models and by focusing on how to deliver better solutions for the pain points that were not addressed by traditional financial institutions (banks). FinTechs were able to understand, before anyone else, the importance of reducing friction and making online payments more secure. These two factors were the driving force behind the entire payment evolution – reducing friction and increasing security.

What prevents airlines from following the latest payment trends?

Currently, there are more than 300 Alternative Forms of Payment (AFOPs) worldwide. This is a great indicator of how much the area of payments really evolved. To bring things in perspective: in 2012, card payments accounted for 57% of online payments. In 2017, their share decreased to 41%, while AFOPs were responsible for 59%. Still, over 80% of airlines worldwide still only accept card payments. From my experience, there are three main reasons why airlines are not adopting AFOPs across their digital channels:

Lack of understanding of current customer expectations when it comes to payments

Lack of understanding of the current trends in eCommerce (airlines are a big part of the eCommerce ecosystem when you consider that more than 85% of airlines’ revenues, on average, come from online digital channels)

Lack of technology readiness (airlines can’t easily integrate and support new payment methods because of legacy systems).

So, what would help airlines better understand what is important when it comes to current customer’s expectations regarding payments? To really understand this, airlines would first need to understand how payments evolved and how customer expectations evolved as a result of these changes.

How has payment evolution changed customer expectations?

15-10 years ago, cards were the only online payment option. When making a purchase at an eCommerce website, the customer had to insert various card details required to complete the purchase (card number, CVV, Expiration Date, personal information, etc.). The number of fields directly contributed to the added friction on the checkout page. The customer would have to do this for every payment, repeatedly. As if friction were not bad enough, customers had to do this for every retailer or business they wanted to do business with. But customers don’t trust every retailer. Customers don’t want to leave their sensitive data everywhere they go. Friction coupled with the risk to the security of sensitive data resulted in the checkout page becoming the number one friction point in the purchase journey.

Fortunately, new competition was sparked. Wallet companies, like PayPal, came along and what they did was revolutionary! They were able to gain the trust of online shoppers so PayPal stores all the sensitive data on behalf of the customer and in exchange, provides them with a username and password. This resulted in a huge reduction in friction – instead of entering all card data manually, over and over again, the customer only had to remember their PayPal credentials. For the first time, there was a dedicated company, taking care of customers’ sensitive data. This was a big change in the customer’s perspective and a first real evolution of online payments. When a customer visited an eCommerce website, they didn’t have to trust the retailer anymore – if the site supported PayPal, customers would trust PayPal. They didn’t have to trust individual merchants anymore, they trusted the payment method itself!

If we look at the past 2-3 years, customers are trusting FinTechs even more and are willing to provide even more sensitive data. Customers are willing to upload their biometrics, face scans – anything, just so they can make payments faster. A good example of this is Apple Pay. It was able to reduce even the last point of friction. To make a payment, all a customer has to do is look at the phone and the payment is carried out. But the fully frictionless experience didn’t come at the cost of security. Biometrics are much harder to hack than someone’s credentials.

Since customers are trusting us with their sensitive data so they can get things done faster, it is our obligation to enable them to do so.

What many airlines fail to notice is that these payment methods didn’t become popular because they came from Apple or Google or another big brand. They became popular because of the specific benefits they bring to the customer: reducing friction and increasing security. These payment methods are no longer nice-to-have’s – they are here to stay and customers that are used to them will be hard pressed to accept anything less. Customers want to pay how they want and where they want, and they want the process to be seamless.

What are the current trends in eCommerce that airlines should follow?

on Alipay alone, plane tickets are the 4th most popular product category. Airlines are a big part of the eCommerce ecosystem where it doesn’t matter whether you are selling books or plane tickets, what matters is that you are keeping up with certain trends in order to meet customer expectations. Here are some examples of companies that set the bar for customer expectations:

If a seller does any of these things slower, it will cause frustration. Again, in eCommerce, it doesn’t matter whether you are selling books or plane tickets – we are all in the business of removing friction. In the digital world, it is speed that sells … and in the airline industry, legacy systems are currently the largest challenge when trying to meet customer expectations and removing friction.

What is the largest obstacle in payment innovation for airlines?

Around 75% of all airlines say they cannot innovate in payments because of legacy systems. Their systems became so complex that an introduction of a payment method would require changes across multiple different systems. To make things worse, not all these systems are owned by the airline (e.g. Inventory Management System). So, any change would require you to synchronize activities across many internal IT departments as well as with vendors of 3rd party solutions. The result of this is that only 18% of airlines see a valid business case in introducing a new payment method. Well, if you must change numerous systems and spend a lot of resources without knowing exactly what the ROI is, it doesn’t make a really compelling business case. Almost all airlines (90%) are worried about security. If an airline has to store sensitive data, like credit card data, it has to be PCI compliant. If an airline wants to support wire transfers, then this is another set of sensitive data that an airline needs to worry about. Also, any new payment methods come with new risks of fraud.

All of these statistics combined show that only 15% of all airlines worldwide even attempted something similar to payment innovation. This is a great example of how big of a challenge legacy systems are when it comes to meeting customer expectations regarding payments.

To overcome the issues with legacy systems and really meet customer expectations, airlines need to uplift their payment infrastructures. Decoupling the payment infrastructure will release the rest of airline’s IT systems to focus on their core competency while having a dedicated system that takes care of payment-related complexities and sensitive data.

In my next post, I will be addressing the specific actions that airlines can take in order to uplift their legacy system and drive innovation when it comes to payments (and by doing so, save costs, increase revenue, streamline business processes and much more).